Cellcom has gone ahead with a takeover of Golan Telecom, despite regulatory and government resistance to a combination that would create a player with a 40% market share.
Israeli mobile leader Cellcom (TASE: CEL) has agreed to buy Golan Telecom for NIS1.17bn (US$301.4m), a day after rival Bezeq (TASE:BEZQ) made its own offer.
A spokesperson for Cellcom, whose statement acknowledged that gaining regulatory approval would be “challenging,” declined comment on whether it had any sense of how likely the deal was to be approved by the sector regulator or competition authority.
Spokespeople for the Ministry of Communications (MOC), the Antitrust Authority, Bezeq and Golan did not return calls or emails requesting comment.
Just last week, Haaretz suggested that government officials had decided to oppose a sale of Golan to a rival, with one noting that a Cellcom-Golan combination would hold a 40% market share.
Golan Telecom was founded by Franco-Israeli businessman Michael Golan and partners including Xavier Niel, himself the founder of Iliad. Niel last week acquired share options for 15% of Telecom Italia.
Financing
Cellcom said it would finance the acquisition through a combination of equity and debt, which may include a rights offering. It plans to pay up to NIS400m via a mandatorily convertible five-year note issued by Cellcom to the sellers, and also to issue approximately NIS200m of equity, with the remainder to come from its balance sheet and a debt financing.
Cellcom plans to repay the convertible note by issuing ordinary shares, with a value equal to the principal amount of the note, with the number of shares based on Cellcom’s average share trading price in the Tel Aviv Stock Exchange shortly after the closing date, minus a discount.
The sellers, it added, may request conversion or assign the note at any time after the second anniversary of the closing date. Until conversion, the note will entitle its holder to a fixed deferred amount equal to 3.5% of the principal per annum paid semi-annually and other customary adjustments. Upon conversion or maturity, the company may elect, at its sole discretion, to repay the sellers by the equivalent market value of the shares, rather than issue the shares.
Customers and deal valuation
Launched in 2012, low-cost operator Golan as of this month has 900,000 customers, and is predicting FY 2015 revenue of more than NIS500m (US$128.8m).
The price, Cellcom stated today, represents an enterprise value (EV) of NIS1bn (US$257.2m), and EV/Adjusted EBITDA multiple of approximately 5.0, based on Golan’s forecasted adjusted 2015 EBITDA of NIS204m (US$52.5m). Cellcom published further information on the deal here.
Cellcom chairman of the board Ami Erel the acquisition would “add a low-cost brand to our portfolio.”
Cellcom CEO Nir Sztern said: “We intend to maintain Golan Telecom as an independent company and can assure all Golan Telecom’s customers that we will honour all of their present agreements.”
Rothschild had originally put a NIS1bn (US$259m) price tag on the sale.
Cellcom has 2.85 million customers, while Bezeq has 2.6 million. The country, home to 8 million people, has five network operators and a clutch of MVNOs.
The regulatory view
In September, TelecomFinance reported that the MOC and Antitrust Authority, which are fairly aligned in their thinking, were understood to believe that the ultra-competitive market’s current ARPU (an average NIS60 per month, with some operators acquiring new subscribers at NIS30-35 per month) does not support investment.
While acknowledging that five mobile network operators is “a lot”, officials were at the time thought to like having a maverick in the market and did not necessarily see consolidation as the solution.
In the face of this resistance, operators had turned to network sharing as a medium term solution seen as a precursor to M&A.
The government approved a 50:50 network sharing deal between Partner and Hot Mobile, but did not give the go-ahead to another deal between Cellcom and Golan, whose agreement had not included equal equity stakes.
The MOC allocated 4G licences to the country’s five operators in mid-August following a tender conducted at the start of the year. Hot, Bezeq and Partner said they would launch full services, but Golan and Cellcom’s service rollout has been delayed due to the questions over their planned network JV.